Forbes Dawson Tax Bite – Save IHT on Rental Property

Investment property held directly by individuals can considerably increase the estate for inheritance tax.  If the property has been held for a while there are likely to be inherent capital gains making it difficult to give away without a large capital gains tax charge.

Consider carving out a leasehold interest in the property that begins at some point in the future (within 21 years) and gifting this away.  Delaying the start date of the lease significantly reduces its value.  Where the value of the deferred lease is less than £325,000, hold over relief for capital gains tax will be available if the lease is given to a trust. If the value of the leasehold interest exceeds the inheritance tax nil rate band of £325,000, it may instead need to be given directly to a family member to avoid the 20% lifetime inheritance tax charge.  Capital gains tax may arise but on a much lower value than a gift of the whole property.

Key features:

  •  There are two inheritance tax savings:
  1. After seven years when the value of the gift of the lease  drops out of charge.
  2. A gradual reduction in the estate as the start date of the lease approaches, until at the 21 year date, the full value is within the lease which has been given away.
  •  Capital gains tax is likely to be payable, unless the leasehold value is less than £325,000 and as such can be gifted to a trust, with holdover relief applying.
  • Pre-owned asset tax will apply if the property is one that is occupied by the individual, so is unlikely to be tax efficient in this situation.
  •  The property must have been held for seven years previously.

Tax Bites are a fortnightly article featuring simple updates about key tax opportunities for other professional colleagues and clients.  For further details, contact the author or your usual Forbes Dawson contact via our ‘Contact Us’ page.




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